by Bill Endsley

I first traveled to China in 2001 not long after the real estate reforms of 1999 to help build professional real estate services. China was committed to moving to more privatization of its real estate markets and there was a great desire to replicate often uncriticallythe success of U.S.property markets. Residential housing in urban areas was the first wave. Over the years I saw the land to be taken for the Olympic Park and knew the developers who had the rights to build apartments right next door. It was quite a different world on my recent trip to China to attend an expert roundtable held earlier this month at Renmin University in Beijing on the findings of the International Property Markets Scorecard.

The roundtable was a part of CIPE's larger program in Armenia, China, Kenya, Philippines, and Russia meant to explore the barriers faced by small  businesses in urban commercial property markets and ways to overcome them. The scorecard is a tool evaluating various elements of property markets,  such as property rights or access to credit, showing interconnections between them, and highlighting priorities for reform. The roundtable participants engaged in a lively debate and were determined to make sure that local circumstances are accurately represented in the scorecard. "This came from the U.S. so it will need to be adjusted." This was a new attitude, openly expressed.

Today real estate is the hot topic in China. Privatization of residential  markets has lead to enormous speculation in apartment prices. Everyone now wants to get rich in real estate. The government recently issued a Purchase Limit Order - limiting each family to buying two apartments. The Chinese experiment with partial privatization has led to regulation problems just as the lack of regulation led to problems in the sub-prime crisis in the U.S. Property is a mean for distributing power and for creating economic opportunity. This requires regulation - primarily to monitor system drains. If systems are not aligned properly, power will be diverted to few and economic opportunity will be undermined for many. Ultimately such diversions can cause systems failures. The U.S. housing market has yet to recover from the last system failure.

Credit markets across most assets types in the U.S. remain tight. The Chinese are now also pulling back in commercial markets where there is a trend toward renationalization. Property rights and access to credit are core elements of the property market system. A shock in one area spreads around the entire system, not only affecting residential mortgages but the availability of loans for small businesses.

China's property market system is a dual system. Property rights are bifurcated into land use rights and buildings. The appropriate regulation in a dual system is even more complex. As China formalizes its property markets there are enormous costs. Over the last decade people have at least been compensated when their land and homes are taken for development, although the structure of incentives and fairness of compensation is often in question. At the roundtable one of the participants mentioned that he knew someone who was told by local officials that they could get more money if they demolished their home. The farmer set to tearing down his own house.